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TMX-LSE and Maple both sweeten bids with cash

TORONTO — A week before the London Stock Exchange and TMX Group Inc. are to ask shareholders to bless their planned marriage, the pair sweetened the pot — only to have rival bidder Maple Group do the same thing.

On Wednesday, the TMX and LSE offered a $4 per share special dividend for TMX shareholders. But within hours, Maple — a consortium of Canadian financial institutions — increased its hostile bid for Toronto Stock Exchange owner to $50 a share, with an increased cash component.

The all-share merger of TMX and the London exchange, whose value fluctuates with each group's share price, has been pegged at between $44 and $45 a share.

In the face of the hostile bid from Maple, TMX and the London exchange had also agreed Wednesday to pay a special dividend of 84.1 pence per ordinary share to London Group investors and to increase the regular post-merger dividend "to be consistent with the (higher) current regular dividend of TMX Group."

"It's interesting. I think what they're trying to do is increase the cash component, bring it tighter in line with what Maple seems to be offering" Thomas Caldwell, chairman of Caldwell Securities which owns shares in several exchange groups including TMX, said before Maple revealed its improved bid.

Sweetening the offer through a special dividend was widely viewed as the only option for the friendly London and TMX partners who had structured their tie-up as an all-stock "merger of equals." The billing as "equals" is considered necessary to persuade Canadian government officials and regulators that the transaction does not represent an outright takeover of Canada's securities exchanges by a foreign entity.

On Thursday, proxy advisory firm ISS recommended that TMX shareholders vote in favour of a proposed combination with the LSE, saying there is little incentive for shareholders to support the rival cash-and-stock offer from Maple Group because of the level of leverage involved in that offer.

"We recommend shareholders take the bird in hand and vote for the proposed merger-of-equals with the LSE," the firm said.

In a near-constant war of words between rival bidders since Maple proposed to break up the friendly merger in May, officials from TMX and the London exchange have emphasized the lower leverage — and therefore financial flexibility — their combined exchange group would have.

The London exchange said Wednesday that the dividend enhancements will provide "strong cash returns" for shareholders of both sides of the transatlantic deal "while maintaining disciplined leverage."

Maple representatives have played up the cash component and higher implied price of their $48 a share cash-and-stock bid — before it was raised — which nonetheless requires regulatory approval to combine the Canadian exchange group with a rival domestic trading system and clearing business.

Shareholders of the TMX and London exchange groups are to vote on the proposed merger on June 30. Maple has made its bid conditional on voters rejecting the merger between TMX — owner of the Toronto Stock Exchange — and the London group.

In an interview on Wednesday, Tom Kloet, chief executive of TMX Group, said the company's board of directors and management believe their merger will deliver the most value for shareholders and market participants.

He said discussions with shareholders in the lead up to next Thursday's vote revealed concerns about the reduced dividend in the original all-stock merger proposal. As a result, the firms reassessed their balance sheets and made the dividend adjustments Wednesday, including the one-time special dividend to sweeten the bid that is expected to amount to $660-million.

At the same time, the Maple bid was rejected for a second time by TMX Group directors, who said the rival bidding consortium "has not addressed previously expressed deficiencies."

"The Board takes its fiduciary responsibility extremely seriously and took the time to conduct a careful analysis of the current Maple offer," said Wayne Fox, chairman of the board.

After consulting with legal and financial advisers, directors concluded the offer "is not, and could not reasonably be expected to result in, a superior proposal" to the agreed merger with the London exchange group, he said.

TMX Group issued a statement late Wednesday, after Maple raised its bid, saying the board would fulfil its fiduciary duty and review the revised terms to see whether it constitutes a superior proposal.

In an earlier statement, before Maple increased its bid, the TMX board said Maple had provided "inadequate" information about how it would combine Alpha Trading Systems and CDS Ltd. with the TMX exchange operations, and provided "only 'illustrative values' on which TMX shareholders are not able to rely."

The "lack of information increases the uncertainty of the value of the Maple shares, which constitute a substantial portion of the consideration under the Maple offer," the statement said.

Nonetheless, the board found enough information to conclude the Maple proposal would elevate net debt to 3.7 times operating earnings, resulting "in TMX Group being one of the most leveraged exchange groups in the world," according to the initial statement.

Maple's revised bid made late Wednesday boosts the cash component to $40 from $33.60, and raises the maximum cash consideration to 80 per cent of the $3.8 billion transaction price from 70 per cent. As a result, existing TMX shareholders could end up owning just shy of 28 per cent of the newly created exchange and clearing group, down from 40 per cent.

If its bid were supported by the TMX board, the Maple consortium said it would be willing to negotiate a "reverse break fee" payable to TMX Group if Maple was not able to obtain approval from Competition Board to buy Alpha and CDS Ltd.

The 13-member Maple consortium includes four of the Canada's biggest bank as well as some of the country's largest pension funds such as the Ontario Teachers' Pension Plan Board and the Caisse de depot et placement du Quebec.